During a Monday June 19, 2017 press conference, N.C. Senate leader Phil Berger explains parts of compromise North Carolina state budget that includes an average pay raise of 3.3 percent for teachers in the coming year, and a raise for most other state employees’ pay by a flat $1,000. Retired state employees would receive a 1 percent cost-of-living increase in their pension checks. Travis Longtlong@newsobserver.com

During a Monday June 19, 2017 press conference, N.C. Senate leader Phil Berger explains parts of compromise North Carolina state budget that includes an average pay raise of 3.3 percent for teachers in the coming year, and a raise for most other state employees’ pay by a flat $1,000. Retired state employees would receive a 1 percent cost-of-living increase in their pension checks. Travis Longtlong@newsobserver.com

Income tax cuts postponed until 2019 in NC budget compromise

The final budget compromise announced by House and Senate leaders Monday would sharply cut personal and corporate income taxes – but the new rates won’t kick in until 2019.

The tax plan in the budget, which is expected to pass the legislature later this week, would reduce the personal income tax rate from 5.499 percent to 5.25 percent. It would raise the standard deduction – the amount on which people pay no income taxes unless they itemize – to $20,000 for married couples filing jointly from $17,500.

It would also lower the corporate income tax rate to 2.5 percent from 3 percent.

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Similar proposals were included in the original Senate plan, which boasted of a “billion-dollar middle class tax cut,” but the earlier proposal would have launched the cuts in 2018. The new proposal would instead reduce the state’s revenue by about $530 million over the next two years. The House’s original budget plan increased the standard deduction but didn’t change the overall income tax rates.

“Millions of middle class families will also keep more of their own earnings,” Senate leader Phil Berger said during a news conference Monday, adding that 99 percent of taxpayers will see a tax cut or pay no income taxes under the plan. House Speaker Tim Moore said the change in the standard deduction will mean 95,000 people will no longer owe income taxes.

The 5.25 percent personal income tax rate will be “the lowest rate in the Southeast among states that tax earnings,” according to a news release from House Republicans.

Once the tax cuts are implemented, a married couple earning $80,000 would pay $3,150 in income taxes annually if they don’t itemize deductions – down from $3,437 under current law.

The N.C. Democratic Party criticized the tax cuts in a news release, calling them “more tax giveaways that disproportionately help the wealthy and corporations.” Gov. Roy Cooper also issued a news release saying the budget would “shortchange education, economic development, and middle class families in favor of more tax giveaways that help the wealthy and large corporations.”

Berger argued that Cooper should support the tax plan. “He has indicated he’s in favor of middle-class tax cuts,” the Senate leader said. “The tax cuts that are in here definitely benefit the middle class. It is something that has shown to be beneficial to North Carolina’s economic progress.”

The conservative advocacy group Americans For Prosperity had called for bigger – and more immediate – tax cuts in a memo sent to budget negotiators last week. “Candidly, any tax cut proposal that cuts less than $471.3 million over the next fiscal year – not biennium – is stealing money from North Carolina taxpayers,” AFP state director Donald Bryson wrote.

On Monday, however, Bryson praised the budget in a news release, pointing to “$530 million in much needed tax relief for North Carolina families.”

The final budget also includes a House plan to repeal a sales tax on mill machinery. And it cuts the franchise tax paid by businesses by changing it to a flat $200 tax on the first $1 million of a business’s net worth.